POTENTIAL DEMAND: HOW IT IS CALCULATED AND EXAMPLES - DUDAS - 2025

The potential demand is the total size of the market for a product at a specific time. Represents the upper limit of the market for a product. It is generally measured by the value of sales or the volume of sales. Therefore, it refers to the maximum volume of sales of any product or service in a given market, before the product or service reaches market saturation.

A company that sells items in a certain market has a certain percentage of the total sales volume of that market. The maximum number of items sold by each company that sells them in that same market comprises the potential demand for the items in that market.

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Estimating potential demand is essential for many companies as it helps them compete in today's environments. If it is not estimated, a business may end up overestimating demand. This could result in wasted time, resources, space, and money.

Similarly, a company could also end up underestimating demand. This could lead to cancellations, delays and dissatisfied customers, who could turn to competitors.

How is potential demand calculated?

From a demand-driven business perspective, a key question to consider is: how many customers are interested in the product? This is different from the traditional product-based approach, which deals only with product volume.

With the market-based approach, you will start with the maximum number of customers.

Top-down review

For example, suppose that you are selling security services in the enterprise market and you are trying to solve the potential demand for the next year.

At the highest level, potential demand is defined as all existing companies, for example, 100,000 companies.

In the following stratum, it can be identified that some companies are committed to other suppliers, with contracts that are more than 12 months away from completion. This can reduce the number of customers to 30,000.

In the next layer, of the remaining 30,000 customers, you may notice that 10,000 are interested only in security web applications, which is a service you cannot offer. This will ultimately reduce the potential demand to 20,000 companies.

Although the above steps are illustrative, they are representative of the process that will be undertaken to identify potential market demand from a top-down perspective.

Bottom-up review

Another variant in estimating potential demand is what is called a bottom-up review.

To estimate potential market demand for new products from a bottom-up perspective, it will be necessary to make certain assumptions, along with sound calculations, estimates, and fundamentals.

The first question to ask is who will be the first 5, 50, 500, or 5,000 customers. Good business planners understand their markets and customers on an intimate level. They also test products before releasing them at wholesale or mass production level.

Determination of market demand should be as accurate as possible at each level. Good business planning involves specifically naming the first 5 customers who will adopt the new product and the reasons for doing so.

From there, the next 45 clients can be determined through a good market analysis of the clients' industry types and consultation with your sales teams.

The next 450 customers can be determined through market segmentation. The last 4,500 clients are extrapolated from the assessed market demand.

Other considerations

Once you have this picture, it is suggested to compare this bottom-up view with the previous top-down analysis to ensure that there is a certain level of alignment.

Another factor to consider, which is very relevant for product planning and forecasting, is market growth. This is a factor that will usually be obtained from market research companies.

By obtaining all the market growth statistics, you can compare yourself with the growth of the business itself. For example, it can be found that the market is growing 10% annually, while the business is growing 5%.

In this case, it is clear that market share is being lost to competitors.

The potential demand is not a fixed number, but a function of the established conditions. This function will depend on a number of factors, including environmental, economic, and other market forces.

Examples

A store that sells 1,000 soaps daily then has a demand for 1,000 soaps. However, on weekends, when the number of buyers increases, the demand could be 1,200.

This is just one store demand. This demand will be consumed regardless of the brand of soap available, because it is a necessary product. So any brand that doesn't meet the demand will see a loss of revenue.

So if the demand for soap in the store is 1,000 units and the company is supplying 300 units, then the market demand for the company is 300 units, while the potential demand is 1,000 units.

Companies like P&G and HUL, which make so many units, need to have a constant understanding of market demand, so as not to exceed their production or not to lose the opportunity to sell their products in the market.

Furniture factory

Suppose a furniture factory produces a very popular dining room set, but has constant production problems in manufacturing. Due to these problems, it cannot meet the demand for the product.

At the end of the year, historical sales data shows that the company sold 5,000 dining room sets between September and December. However, historical sales data misses a vital part of the demand equation.

It doesn't show the 2,500 dining room sets that people couldn't buy when they walked into the store, because the company couldn't produce these goods on time.

The 2,500 unsatisfied additional sales bring the actual market demand to 7,500 units (5,000 sold + 2,500 lost sales).

If dining room sets continued to sell at their current rate and the company only used the 5,000 units actually sold as input to forecast future market demand, the forecast would fall short during the same period next year.

This happens because it does not reflect the potential demand of the market. of 7,500 units. This result will lead to loss of sales and, consequently, of the corresponding income.

References

1. Kenneth Hamlett (2019). How Are Market Demand, Market Potential & Sales Forecasting Related to Each Other? Small Business - Chron. Taken from: smallbusiness.chron.com.
2. UK Essays (2016). Estimating potential demand. Taken from: ukessays.com.
3. Study (2019). Market Potential of a Product: Definition & Analysis Example. Taken from: study.com.
4. Parcus Group (2015). How to Estimate Market Demand for a Product? Taken from: parcusgroup.com.
5. Hitesh Bhasin (2018). Market Demand Explained with Examples. Marketing91. Taken from: marketing91.com.